Indian economy’s growth potential is strong
By Nitya Chakraborty
The data released by the International Monetary Fund (IMF) stating that during 2011, India overtook Japan in total GDP on the basis of purchasing power parity (PPP), thereby emerging as the third largest economy in the world after USA and China should act as a boost to the investors- both domestic and foreign as also the policy makers amidst the present not so optimistic state of the economy.
India is a long term player and its growth potential in the coming years due to the policies being pursued now, is immense but the weakness is that the fruits of growth are not distributed and as a result, India remains a nation with high growth and maximum number of poor people. This dichotomy might undergo some small correction in the next two decades but essentially, the poor people will be denied the full fruits of the growth.
Only last month, the Wealth Report 2012 released by Knight Frank & Citi Private Ltd said that in 2050, India will be the largest economy in the world in terms of GDP on the basis of PPP beating China which will remain at the top position from 2020 onwards ahead of USA at first and then ahead of India which is expected to topple the USA for the second position around 2040.This Wealth report projects that India will have a total GDP at $85.97 trillion in 2050 as against China’s US$80.02 trillion, followed by USA with US$39.07 trillion and Indonesia which will acquire the fourth position at US$ 13.93 trillion.
The IMF figures show that India’s share of world GDP in terms of PPP, a measure of relative consumer prices across countries, stood at 5.65 per cent in 2011 against Japan’s 5.63 per cent with the gap expected to widen significantly by 2017.In five years the IMF estimates the share of India’s GDP in PPP terms would grow to 8.09 per cent compared with 4.8 per cent for Japan. India, according to IMF’s calculations, was able to overtake Japan in 2011 because the economy grew 7.24 per cent whereas in the case of Japan, it shrank 0.75 per cent, hit by a tsunami that ravaged the country and exacerbated the adverse impact of global economic slowdown.
Significantly, the leading experts feel that India is in a position to sustain growth during the next ten years and beyond while China has a real threat of its growth declining. There are two real risks to global recovery at this juncture – the Iran conflict and its impact on oil prices as also the possibility of hard landing in China. If China’s GDP growth slows down drastically from the current expectations of 7.5 to 8 per cent, that could come as a big negative impact for the markets. Such a development may be perceived as a growth scare which may take global markets down. Some risk may be taken off the table as people ascertain the impact of China’s slowdown on an already muted growth trajectory of Europe and US.
But the experts feel that India could benefit from such a scenario because generally a slowdown in China brings down commodity prices including that of crude oil. Unlike Brazil and Russia, this development may help India stand out as it gains flexibility to reduce interest rates. So declining interest rats and commodity prices, along with consumption driven GDP growth, may turn India into an interesting market for investors.
Already, the western countries are saying that India is not an emerging economy, it has already emerged and it should not be given the soft loans by the international financial institutions since India is in a position to generate resources for its own development. While India is projected to achieve high growth rate as against the developed countries and also beating China, the fact is that in terms of per capital GDP, the amount will be still very low compared to the developed countries which are having low growth. The PPP system allows GDP comparisons to be made by asking how much money would be needed to purchase the same goods and services in two countries and using that to calculate an implicit foreign exchange rate.
Under this method, a dollar should be able to buy the same amount of goods anywhere in the world and exchange rates should adjust accordingly. As explained by a senior economist of a foreign bank, it also strips away distortions that come with market exchange rates which are often volatile, affected by political and financial factors that do not lead to immediate changes in income and tend to understand the standard of living in poor countries. The London based The Economist weekly also has its own Big ac Index which takes the price of a McDonald burger across 120 countries to calculate the real price of their currencies. It shows that the Indian rupee was undervalued against the US dollar in January to the extent of 62 per cent. Experts say that PPP methods help adjust income to prices for a meaningful comparison on quality of life in countries with widely different prices and incomes.
All the recent studies about growth projections show that the west is on a decline and during the next four decades, the countries which are at the low end of the global economy, will go up in the growth list in a big way. For instance, Nigeria will have the highest growth rate during 2010-2050 period at 8.5 per cent followed by India at 8 per cent and Nigeria will be the sixth largest economy in the world in 2050.What is helping India in moving forward in the coming years is its demographic profile- the high share of the youngest people in the total population of the country. China is losing the advantage due to its one child norm. Further, all the focus on skill development in the recent years as also big emphasis on innovations are helping in increasing productivity in the economy.
Experts in the Government feel that the economic decision making process might be slow now, but the situation will drastically change if there is a stable government. There is a aspiration for change and better living and this is widespread covering the rural and semi urban areas. Indian society has been turning aspirational – quite different from the earlier times when people believed in destiny and were reconciled to the present state. There is a crave for change for the better and that is shaping the growth process in the Indian economy. (IPA Service)